Prime United Inc. v. Sears Holdings Mgmt. Corp.

• Decision Date: 16 July 2013
• Docket Number: No. 12 C 5364,12 C 5364
• Parties: PRIME UNITED INC. Claimant-Counterrespondent, v. SEARS HOLDINGS MANAGEMENT CORPORATION Respondent-Counterclaimant.
• Court: U.S. District Court — Northern District of Illinois

PRIME UNITED INC. Claimant-Counterrespondent, v. SEARS HOLDINGS MANAGEMENT CORPORATION Respondent-Counterclaimant.

No. 12 C 5364

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Entered: July 16, 2013

Judge John J. Tharp, Jr.

MEMORANDUM OPINION AND ORDER

Prime United Inc. ("Prime") moves pursuant to the Federal Arbitration Act ("FAA") to vacate and modify an arbitration award entered in favor of Sears Holdings Management Corporation ("Sears").¹ In response, Sears applies to confirm the arbitration award. For the reasons stated below, the Court denies Prime's motion to modify and vacate the arbitration award and grants Sears' application to confirm the arbitration award because Prime has failed to demonstrate any ground to vacate or modify the award.

I. Background

Prime manufactures shoes, and Sears sells them at retail. On August 5, 2008, Prime and Sears entered into a Universal Terms and Conditions Agreement ("Agreement") that would govern future purchase orders for the supply of merchandise from Prime to Sears. Agreement (Dkt. 1-1). In pertinent part, Prime represented and warranted that its merchandise would not infringe on any intellectual property rights, and it would produce its merchandise in compliance with applicable law. Id. §§ 8.3-8.4. Furthermore, in the event of allegations that Prime'smerchandise infringed on intellectual property rights or violated the law, Prime agreed to indemnify and defend Sears, and gave Sears the right to immediately cancel any outstanding purchase orders. Id. § 14. Sears's monetary obligations to Prime would at all times be net of any defense and indemnity obligations. Id. The parties also agreed that if they could not resolve a dispute via mediation, they would submit it to arbitration. Id. § 17.6

The parties' commercial relationship did not go smoothly. Sears alleges that in August of 2010, it received a letter from another footwear manufacturer, Skechers, claiming that Prime's shoes infringed on Skechers's intellectual property rights. Sears Resp. Br. (Dkt. 11) at 2. After Prime allegedly refused to indemnify and defend Sears from Skechers' claims in accordance with the Agreement, Sears withheld a $181,000 payment for shoes that it had already received from Prime, and canceled nearly $475,000 in additional purchase orders for shoes that had not yet been delivered. Id.

Prime claimed that Sears violated the Agreement by failing to pay for the shoes it received and by cancelling its purchase orders. Arb. Demand (Dkt. 1-1). Prime demanded arbitration, and argued: (1) that the arbitrator should award Prime $181,000, representing the amount that Sears owed, but withheld, for the shoes that it had received from Prime; and (2) that the arbitrator should award $474,181.70, representing the purchase price of shoes that Sears ordered but later canceled. Id. Sears asserted two counterclaims against Prime: (1) Prime should reimburse Sears in the amount of $463,525.85 for the attorneys' fees it paid to defend Skechers' claims; and (2) Prime should reimburse Sears for costs and lost revenue that Sears incurred by changing the packaging and advertising of certain of Prime's shoes that allegedly violated Skechers' intellectual property. Award (Dkt. 1-1) at 2. Ultimately, the arbitrator granted Prime's first claim of $181,000, but also partially granted Sears' first claim, ordering Prime to reimburseSears $265,000 for attorneys' fees.² Id. Setting off the two awards, the arbitrator ordered Prime to pay $84,000 to Sears. Id. Prime moved the arbitrator to reconsider, but he denied the motion, noting that the parties had "instructed him to provide an unreasoned decision." Order (Dkt. 11-1).

II. Choice of Law

The parties agree that the FAA, as opposed to the Illinois Uniform Arbitration Act ("IUAA"), applies to their dispute. See Prime Reply Br. (Dkt. 13) at 1 (stating that Sears correctly identified FAA § 10(a)(4) as controlling the motion to vacate). The Agreement contains a general provision stating that it is to be "construed and enforced in accordance with the internal laws of the State of Illinois," Agreement (Dkt. 1-1) § 17.5, but it does not specify whether the FAA or the IUAA applies.

In this case, regardless of whether the FAA or the IUAA applies, the end result would be the same. "The language of the FAA and the Illinois Uniform Arbitration Act is essentially the same." Gillispie v. Vill. of Franklin Park, 405 F. Supp. 2d 904, 909 (N.D. Ill. 2005) (collecting cases); see also Vazquez v. Central States Joint Bd., 547 F. Supp. 2d 833, 865 n. 19 (N.D. Ill. 2008); Rexnord Indus., LLC v. RHI Holdings, Inc., 389 Ill. App. 3d 393, 396, 906 N.E.2d 682, 684 (Ill. App. Ct. 2009) (stating that the IUAA's "terms and origins parallel those of the [FAA]," and relying on federal interpretations of the FAA to determine whether the arbitrator exceeded his authority). The IUAA, like the FAA, states that a court shall vacate an arbitration award where "[t]he arbitrators exceeded their powers." 710 Ill. Comp. St. 5/12(3). The standards for vacating an arbitration award are "practically the same" under both statutes. BEM I, LLC v.Anthropologie, Inc., No. 98 C 358, 2000 WL 1849574, *7 n. 7 (N.D. Ill. Dec. 15, 2000).³ Because the parties frame their dispute in terms of the FAA, and the end result would be the same under either federal or state law, the Court will examine Prime's arguments under the FAA.

III. Analysis

"Judicial review of an arbitration . . . award is extremely limited," Yasuda Fire & Marine Ins. Co. of Eur., Ltd. v. Cont'l Cas. Co., 37 F.3d 345, 349 (7th Cir. 1994), and parties may not make "[t]hinly veiled attempts to obtain appellate review of an arbitrator's decision." Flexible Mfg. Sys. Pty. Ltd. v. Super Prods. Corp., 86 F.3d 96, 100 (7th Cir. 1996) (quoting Gingiss Int'l, Inc. v. Bormet, 58 F.3d 328, 333 (7th Cir. 1995)) (internal quotation marks omitted). According to the FAA, a court may vacate⁴ an arbitration award only:

(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10 (2006).

An arbitrator's award should be enforced "so long as it draws its essence from the contract, even if the court believes that the arbitrator misconstrued its provisions." United Food and Commercial Workers, Local 1546 v. Illinois-American Water Co., 569 F.3d 750, 754 (7th Cir. 2009) (internal quotation omitted). The award "draws its essence from the contract" if it is premised on the arbitrator's interpretation of the contract, "correct or incorrect though that interpretation may be." Id. "Indeed, it is only when the arbitrator must have based his award on some body of thought, or feeling, or policy, or law that is outside the contract that the award can be said not to draw its essence from the parties' agreement." Id. at 755. (emphasis in original, internal alterations omitted). A court may not vacate an award because of the arbitrator's factual or legal errors—even when those errors are clear or gross. Flexible Mfg. Sys. Pty. Ltd., 86 F.3d at 100.

Section 10(a)(4)⁵ of the FAA provides that a court may vacate an award if an "arbitrator[] exceeded [his] powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." Prime does not rely on the second clause of this provision and, in any event, the record suggests that the arbitrator resolved the entire dispute submitted to him, and the award is sufficiently clear to be judicially enforceable. IDS Life Ins. Co. v. Royal Alliance Assocs., Inc., 266 F.3d 645, 650 (7th Cir. 2001) ("mutual" and "final" "mean that the arbitrators must have resolved the entire dispute . . . that had been submitted to them" and "definite" means "that the award is sufficiently clear and specific to be enforced should it be confirmed by the district court and thus made judicially enforceable.").

Thus, Prime's only argument for vacating the award is the first clause of Section 10(a)(4), that the arbitrator exceeded his powers. In order for the Court to find that the arbitrator exceeded his powers, Prime would have to show that the arbitrator failed to interpret the contract at all, see Wise v. Wachovia Sec., LLC, 450 F.3d 265, 269 (7th Cir. 2006); Prostyakov v. Masco Corp., 513 F.3d 716, 723 (7th Cir. 2008) (stating that the court will uphold an award unless the court infers a non-contractual basis for it because there is no other possible interpretive route), or that the arbitrator was in "manifest disregard of the law." Wise, 450 F.3d at 268 (The Seventh Circuit defines "'manifest disregard of the law' so narrowly that it fits comfortably under the first clause of the fourth statutory ground—'where the arbitrators exceeded their powers.'"). Arbitrators are in manifest disregard of the law when they require the parties to violate the law or do not adhere to the legal principles that the contract specifies. Halim v. Great Gatsby's Auction Gallery, Inc., 516 F.3d 557, 563 (7th Cir. 2008).

Prime's argument under this clause essentially boils down to three assertions. First, the arbitrator found that Sears breached the contract by awarding Prime $181,000. Mot. to Vacate (Dkt. 1) ¶¶ 5-9. Second, under Illinois law, this non-payment must be considered a material breach. Reply Br. (Dkt. 13) p. 2-3. And third, Sears's material breach terminated Prime's contractual obligations, so Sears could not take advantage of the...